Five Things to Know About India’s Proposed Goods and Services Tax

India’s government is attempting to reform its messy web of sales taxes to make doing business across the country easier. Lawmakers are expected to vote on the new goods-and-services tax on Thursday. It was passed by the lower house on Wednesday. Here’s what you should know about it.

7 May 2015 2:35am

By

Raymond Zhong

1What’s the Tax System for Goods and Services in India Right Now?Share on Twitter

At the moment, India’s states each have their own regime for taxing goods, the federal government taxes services and manufactured products, and a separate levy hits interstate sales. States charge very different levies on the same goods. For instance, in Sikkim in the north east, sales tax on diapers runs to 13.5% whereas in Haryana there is no levy on the product.

This complicated web snarls companies in red tape and slows down the transit of goods around the country because of border checks and other official inspections.

Prime Minister Narendra Modi’s government wants to replace the patchwork of taxes with a single, nationwide sales levy, known as the goods-and-services tax, or GST. Economists call the move an epochal lowering of commercial barriers.

GST bill passed through the lower house of Parliament on Wednesday. But the government faces a tougher test in the upper house, where it doesn’t enjoy a majority. The bill needs the consent of two-thirds of Parliament and half of India’s 29 states. Finance Minister Arun Jaitley wants the new system up and running by April 2016, saying it will “play a transformative role in the way our economy functions.”

States with large manufacturing bases have been wary of the GST: Receipts from the new tax would go to states where goods and services are consumed, not where they are produced.

The Modi government in December agreed to compensate states for lost revenue during the levy’s first five years, and to let them continue taxing alcohol and petroleum separately. Some experts say these and other possible exemptions would curb the GST’s effectiveness, however. The more items that are excluded from the new levy, the higher the rate will need to be to generate the same amount of revenue.

Mr. Jaitley told lawmakers on Wednesday that the standardized national rate for GST would be “much more diluted” than the 27% estimated, by one calculation, as the one needed to ensure no loss of revenue. “I straightaway concede that 27% would be very high,” he said.